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Morgan Stanley Says: A Strong US Dollar will Push the Fed to Change Course on Interest Rate Increases, but that won’t be Sufficient to Stop an Earnings Recession

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According to Morgan Stanley- Mike Wilson, global US dollar availability is now in the “danger zone where terrible things happen,” making it highly possible that the Federal Reserve will change course from its recent hawkish monetary policy.

The Fed will undoubtedly need to act similarly, whether that means pausing rate increases or engaging in entire Quantitative Easing (QE), similarly, Bank of England had to negotiate last week by buying long-dated bonds to quell rising gilt yields.

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“The first thing to consider is when the US dollar becomes a US issue. Nobody can assume when, but if price action continues in the manner it has been, the Fed will probably back off” Wilson stated.

However, he warned, investors shouldn’t place too much faith in a prospective Fed reversal. That’s because there will soon be an earnings recession, and the potential downside for the stock market from a significant earnings reduction would probably exceed the possible gain from a Fed turn.

Wilson claims that many macro risks that businesses have recently been pushed to manage, such as China’s COVID lockdowns, a strengthening US dollar, increased interest rates, and instability in Europe’s economy, will be the primary causes of the decreased earnings.

According to Wilson, “We believe the concern these variables create, will lead to both guidelines pulls and lowered guidance, both would serve as headwinds for future earnings predictions. However, given forward earnings expectations have only decreased by 1% since mid-June, the expected loss in revenue expectations could be huge.